Supply chain financing

Under supply chain financing, a company sends its approved payables list to its bank, specifying the dates on which invoice payments are to be made.  The bank makes these payments on behalf of the company.  However, in addition to this basic payables function, the bank also contacts the company’s suppliers with an offer of early payment, in exchange for a financing charge for the period until maturity.  If a supplier agrees with this arrangement and signs a receivables sale contract, then the bank delivers payment from its own funds to the supplier, less its fee.  Once the company’s payment dates are reached, the bank removes the funds from the company’s account, transferring some of the cash to those suppliers electing to be paid on the pre-arrangement settlement date, and transferring the remaining funds to its own account to pay for those invoices that it paid early to suppliers at a discount.

Supply chain financing works very well for suppliers, since they may be in need of early settlement.  In addition, they receive a much higher percentage of invoice face value than would be the case if they opted for a factoring arrangement with a third party, where 80% of the invoice is typically the maximum amount that will be advanced.  Also, the amount of the discount offered by the bank may be quite small, if the company is a large and well-funded entity having excellent credit.  Finally, the arrangement is usually non-recourse for the supplier, since the arrangement with the bank is structured as a receivables assignment.

The arrangement also works well for the bank, which has excellent visibility into the company’s bank balances and cash flow history, and so knows when it can offer such financing.  Also, it obtains fees from the company in exchange for disbursing funds on behalf of the company.

Supply chain financing is also a good deal for the company, whose suppliers now have ready access to funds.  Further, since the bank is contacting suppliers with payment dates, they will no longer make inquiries of the company regarding when they will be paid.

Supply chain financing is less useful when payment terms are relatively short, since there is not much benefit for suppliers in being paid just a few days early.  However, it is an excellent tool when standard payment terms are quite long.